Law and You > Corporate Laws > Companies Act, 2013 > Liability of a Company: Limited or Unlimited
According to Section 2(20) of the Companies Act, 2013, ‘company’ means a company incorporated under the Act, or under the previous company law”. A company may be an incorporated company or a Corporation, or an unincorporated company. An incorporated company is a single and legal (artificial) person distinct from the individuals constituting it, whereas an unincorporated company, such as a partnership, is a mere collection or aggregation of individuals. Therefore, unlike a partnership, a company is a corporate body and a legal person having status and personality distinct and separate from that of the members constituting it. In this article, let us discuss liability of a company.
Classification of Companies on the Basis of Liability:
Companies on the basis of liability can be classified as follows:
Company Limited by Shares:
When we say company limited by shares it means a limited company.
According to Section 2 (22) of the Companies Act, 2013, when the liability of the members of a company is limited by its memorandum of association to the amount (if any) unpaid on the shares held by them, it is known as a company limited by shares.
Thus, for meeting the debts of the company, the shareholder may be called upon to contribute only to the extent of the amount, which remains unpaid on his shareholdings. His separate or personal property cannot be encompassed to meet the company’s debt.
Company Limited by Guarantee:
According to Section Section 2 (21) of the Companies Act, 2013, the company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake by the memorandum to contribute to the assets of the company in the event of its being wound up.
Thus, the liability of the member of a guarantee company is limited up to a stipulated sum mentioned in the memorandum. Members cannot be called upon to contribute beyond that stipulated sum.
Unlimited Company:
(According to Section Section 2 (92) of the Companies Act, 2013, a company not having any limit on the liability of its members.
In such a company the liability of a member ceases when he ceases to be a member. The liability of each member extends to the whole amount of the company’s debts and liabilities but he will be entitled to claim contribution from other members.
Difference between Company Limited by Shares and Company Limited by Guarantee:
Under the Companies Act, 2013, companies can be classified based on the nature of liability of their members. Two common forms are Company Limited by Shares and Company Limited by Guarantee.
| Company Limited by Shares | Company Limited by Guarantee |
| Liability is limited to the unpaid amount on their shares. If shares are fully paid up, no further liability arises. | Limited to the amount they guarantee to contribute (known as “guaranteed amount”) in the event of the company being wound up. |
| The company raises capital by issuing shares. | These company does not issue share |
| The object is mostly profit making. | Such type of companies, are often used for non-profit or charitable purposes (e.g., education, research, or social welfare). |
| The ownership of the company is determined by the proportion of shares held by each shareholder. | These companies do not have shareholders. Instead, they have members who contribute towards the functioning of the company. |
| Profits can be distributed as dividends to shareholders based on the number of shares they hold. | Since these companies are usually non-profit, profits are reinvested in the company’s objectives and not distributed as dividends. |
| In public limited companies, shares are freely transferable, but in private limited companies, there may be restrictions. | Membership is generally not transferable, as these companies are typically based on individual contributions rather than financial stakes. |
| For Example: If a shareholder holds 100 shares worth ₹10 each, and they have already paid ₹8 per share, they will only be liable to pay the remaining ₹2 per share (₹200 in total) if the company faces losses or winds up. | For Example: If a member guarantees ₹10,000, that amount will be their maximum liability in case the company is wound up, even if they have not made any prior financial contributions. |
Difference between Limited Liability Company and Unlimited Liability Company
The main difference between a Limited Liability Company (LLC) and an Unlimited Liability Company lies in the extent to which the members or shareholders are personally liable for the company’s debts and obligations.
| Limited Liability Company | Unlimited Liability Company |
| In limited liability company, members’ liability is limited to the unpaid amount on their shares or the amount they have invested. | In unlimited liability company, members’ liability is unlimited, meaning they are personally responsible for the company’s debts and obligations, even to the extent of using their personal assets. |
| Personal assets of the members are not at risk in case the company is sued or faces debts. | The personal assets of the members are at risk if the company goes bankrupt or incurs heavy debts. |
| This type of company is suitable for businesses where owners want to limit their financial exposure. | This type of structure is not common because of the high personal financial risk involved. |
| They can be Private Limited Company (Pvt Ltd), Public Limited Company (Ltd) or One Person Company (OPC) | Generally used in professional firms, partnerships, or businesses where owners are willing to take on full personal liability. |
| For Example: If a shareholder owns 100 shares worth ₹10 each in a private limited company, their maximum liability in the event of liquidation would be ₹1,000 (provided their shares are unpaid). They are not responsible for any company debts beyond this amount. | For Example: If an unlimited liability company has ₹10 lakh in debts and the company cannot pay, the members may be required to cover the entire ₹10 lakh from their personal assets. |
Conclusion:
The liability of a company defines the extent to which its members or shareholders are responsible for the company’s debts and obligations. This concept plays a crucial role in shaping the legal structure of a business and its risk profile.Limited Liability offers protection to shareholders by restricting their financial responsibility to the amount they have invested in or committed to the company. This structure, common in Private Limited Companies (Pvt Ltd), Public Limited Companies (Ltd), andOne Person Companies (OPC), and is popular due to its capacity to protect personal assets while fostering business growth.Unlimited Liability, on the other hand, exposes members to personal financial risk, as they are personally liable for the company’s debts. This structure, though rare, is more commonly seen in professional firms and partnerships where members are willing to take on higher personal risk.
In conclusion, the liability structure of a company significantly influences both the risk for its members and its appeal to investors. Limited liability is the most favourable for protecting personal assets and encouraging entrepreneurship, while unlimited liability is used where members are comfortable accepting greater financial risks. Understanding these differences helps business owners make informed decisions about the structure and risk level of their companies.